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Brussels, 8 December 2010

Frequently Asked Questions: Communication on reinforcing sanctioning regimes in the financial services sector

What are sanctioning regimes?

Sanctioning regimes are defined as the legal framework covering sanctions provided for in national legislation for the violations of EU financial services rules (including the national rules transposing EU directives) by financial institutions and other market participants, and actual enforcement of sanctions.

Why is the Commission considering action on sanctions?

The financial crisis has highlighted that financial market rules are not always respected and applied as they should be across the European Union. Lack of enforcement of EU rules in one Member State may have significant implications for the stability and functioning of the financial system in another Member State. And when the rules all financial players are expected to abide to are the same, it is only right for non-respect of those rules to entail similar consequences.

It is therefore essential to ensure a consistent and effective application of EU rules in all Member States. Sanctions which are sufficiently deterrent and effectively applied can significantly help to ensure better enforcement of EU financial services rules.

The Communication is based on a wide stocktaking exercising of how sanctions have been applied in the banking, insurance and securities sectors. This exercise finds that sanctions provided for by Member States are largely divergent in key aspects such as the types of sanctions available and the level of fines. Furthermore, they do not always seem appropriate to effectively deter financial services providers from violating EU rules.

For example, in the banking sector the maximum amount of fines provided for in case of a violation is unlimited or variable in 6 Member States, more than 1 million euro in 9 Member States, and less than 150 000 euro in 7 Member States. Certain Member States including BG, LT, LU, LV, AU, DE, HU, PL, SI, EE, CY, MT are at the lower end of the level of fines available by law in banking and insurance.

This situation may create distortions of competition in the Internal Market. And, decisively, it may also create the risk of undermining consumer protection, market integrity, and confidence in the financial sector.

Which are the Member States where sanctions are too weak?

Sanctions are not only different from one Member State to the other; they are also divergent in some Member States in areas such as banking or securities, for example. The Commission has therefore identified certain divergences and weaknesses relating to sanctions applied across Europe. For more examples, see annex.

What is the Commission proposing?

The Commission is considering whether a minimum common standard should be set at European level for certain issues that are key for effective, proportionate, and deterrent sanctioning regimes.

This could include: types of sanctions for not respecting financial services rules, including whether criminal sanctions may be necessary; the availability of sanctions against financial institutions and individuals responsible for violations; and the publication of sanctions.

What kinds of sanctions are covered by the Communication?

The Communication covers all types of sanctions which can be imposed on individuals or financial institutions which do not respect EU rules or national laws transposing those rules:

  • It refers to "sanctions" in a broad sense covering the whole spectrum of actions applied after a violation is committed, and which are intended to prevent the offender as well as the general public from committing further infringements.

  • It also covers administrative powers – such as the withdrawal of authorisation - which are considered as sanctions only in some EU Member States, while others consider them as another type of power.

The Communication covers administrative sanctions, but also addresses criminal sanctions, in line with the new opportunities that the Lisbon Treaty offers.

Will the Commission take legislative action?

The Commission has launched a public consultation on the Communication. On the basis of the comments received, the Commission will decide in 2011 on possible proposals on how to reinforce sanctioning regimes. This could be applicable to the whole panorama of financial sector legislation – including the alternative investment fund directive, MiFID, Solvency 2, Market Abuse Directive etc.

Does the Commission intend to fully harmonise sanctions?

No. In view of the great variety of legal principles and traditions between Member States, the Commission does not suggest a full harmonisation of sanctions. It suggests greater convergence of sanctions at a higher level.

Does the Commission intend to centralise the power to sanction financial institutions?

The objective of the Communication is not to increase the EU's powers on sanctions but to consider the need for further convergence of sanctions applied by the Member States. The Communication does not suggest conferring any sanctioning powers on EU institutions or bodies.

Why can the problem not be resolved by actions taken at national level?

EU action is necessary because the general principles of the Member States' sanctioning regimes have not achieved sufficient convergence so far. And in line with internal market principles, it makes sense for non-respect of EU-wide rules to be coherent or there could be a risk of "sanction shopping". The Council of Ministers and the European Parliament have recognised the need for EU action on sanctions in the financial services area to ensure a certain convergence for many years.

National authorities need to act in a coordinated and integrated way, and a proper enforcement of EU legislation throughout the EU requires that all national authorities have at their disposal appropriate and comparable sanctioning powers.

How is this Communication linked to other Commission proposals such as the one on Credit Rating Agencies and the one on the new European supervisory authorities?

This Communication does not concern the new EU sanctioning powers in the area of Credit Rating Agencies (CRAs). They will be supervised exclusively by the European Securities and Markets Authority (see MEMO/10/434).

However, in other areas of EU financial services, the Communication considers the need for further convergence of sanctions applied by the Member States.

Efficient and sufficiently convergent sanctioning regimes are the necessary corollary to the new European Supervisory Authorities which will be set up on 1 January 2011, and will bring about improvements in the coordination of national authorities' enforcement activities.

What is done at international level in the area of sanctions?

At international level, strengthening sanctioning regimes is one of the elements of the roadmap for financial sector reform. In the summit held in Washington on 15 November 2008, G20 leaders agreed on the implementation of an Action plan for Reform of financial markets including actions aimed at protecting markets and investors against illicit conduct and ensuring that appropriate sanctioning regimes are in place. Increasing regulatory enforcement and remedies is also one of the objectives of the recent US financial regulation reform.

Annex: examples of divergences and weaknesses

Some competent authorities do not have at their disposal important types of sanctioning powers for certain violations

  • For example, in 6 Member States there is no possibility to withdraw the authorisation in case of violations of the Market Abuse Directive.

  • 15 Member States do not provide for the disqualification/dismissal of the management and/or supervisory body in cases involving market manipulation under this Directive.

  • For example, under MiFID, 5 Member States do not provide for public reprimands/warnings and 7 Member States do not provide for the publication of sanctions.

  • In the insurance sector, only 14 supervisory authorities consistently publish sanctions.

The levels of administrative pecuniary sanctions (fines) vary widely across Member States and are too low in some Member States

  • For example, in the banking sector the maximum amount of fines provided for in case of a violation is unlimited or variable in 6 Member States, more than 1 million euro in 9 Member States, less than 150 000 euro in 7 Member States.

  • In the securities sector, among the 18 Member States providing for administrative fines for violations of the prohibition of insider dealing, 4 Member States provide for maximum fines of 200 000 euro or less, while only 12 Member States provide for fines of 1 million euro or higher. In the case of violations of the minimum conditions for authorisation of investment firms, 17 Member States provide for maximum fines of less than 1 million and in 6 of them the maximum amount is 100 000 euro or less.

  • In the insurance sector, fines are unlimited or can reach 1 million euro or more in 10 Member States, they are between 100 000 and 1 million euro in 7 Member States, and less than 100 000 euro in 6 Member States.

Some competent authorities cannot address administrative sanctions to both natural and legal persons

  • For instance, some Member States do not provide for the application of sanctions to individuals (e.g. executives) in the insurance sector.

Competent authorities do not take into account the same criteria in the application of sanctions

  • For example, for the violation of insider dealing under the Market Abuse Directive, only 12 Member States provide for sanctions corresponding at least to the benefit derived from the violation.

  • In the banking sector, only 17 Member States take into account the financial strength of a financial institution when determining the level of a fine imposed on it.

  • Only 5 Member States take into account that factor in the application of fines for violations of the UCITS Directive1.

  • For example, in the insurance sector, the cooperation with the authorities is taken into account in 18 Member States only.

Divergence exists in the nature (administrative or criminal) of sanctions provided for in national legislation

  • For example, while all Member States provide for administrative sanctions in the case of violations of the MiFID Directive, only 13 Member States also provide for criminal sanctions.

The level of application of sanctions varies across Member States

  • For example, the number of sanctions in the banking sector applied in different Member States in 2007 ranges from 0 to more than 100, and divergences also exist in Member States having financial banking sectors of similar size. Some Member States have not applied any sanction for more than two years (2006/2007/first quarter of 2008).

1 :

Sources: information provided by CESR members on sanctions envisaged in national rules transposing the UCITS Directive.

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